The market reveals its true character in quiet moments. When the price moves are gentle, trading volume is muted and the news slate is light, the flow of investor money offers subtle clues about the market’s best guesses and fondest hopes about the near future.
Thursday was such a day, as the S&P 500 (^GSPC) made a now-typical grudging, low-drama shuffle to a new all-time high, rising less than one-quarter of a percent as measures of expected volatility sank ahead of the holiday weekend.
One valid critique of the recent rally has been its narrowness, with a relative few stocks driving things. Yet a look at the stocks that did manage to scale new heights on this day shows what the market is fixated on – and in this case, it seems that corporate deal making is animating the action below the surface.
There were 33 large-cap stocks above $5 billion in market value that made a new all-time high Thursday. Absent were any names that are direct plays on an accelerating domestic economy – no retailers or banks, only a couple of stray industrials. The new-high list was heavy with media, health services, software and selected food names – and a heavy proportion of them are viewed as takeover bait or deal beneficiaries of another sort.
The roster includes Time Warner Cable Inc. (TWC), DirecTV (DTV) and Liberty Global Inc. (LBTYA) from the fast-consolidating media-delivery sector. Time Warner Cable has been openly in play since its deal to be bought by Comcast Corp. (CMCSA) was scuttled by regulators. And today the Wall Street Journal reports that the FCC chairman reached out to cable executives to emphasize that the agency is not ruling out other mergers just because it was uneasy over the Comcast gambit.
Also hitting new highs were Express Scripts Inc. (ESRX), lifted in sympathy with Thursday’s bid by CVS Corp. (CVS) to buy institutional pharmacy Omnicare (OCR). Meantime, Bloomberg details the determined hunt of pharma giant Pfizer Inc. (PFE) for a big acquisition after its Astra Zeneca plc (AZN) “inversion” merger last year was called off. The software group at peak prices features such perennial takeout candidates as Intuit Inc. (INTU) and Adobe Systems Inc. (ADBE).
Auto-parts makers Lear Corp. (LEA) and Magna International (MGA) are also on the list, and also in a business being actively consolidated, as TRW Automotive agreed to be sold a few months ago to Germany's ZF Group. Slow-growth, second-tier packaged-foods producer Conagra Foods Inc. (CAG) is there too. This is a name that hedge funds have targeted either for a sale or a lucrative breakup in recent months.
None if this is to say that these particular stocks are high-probability takeover plays. But the market’s preference for companies with a perceived deal catalyst makes sense. The growth picture has grown cloudy and the vigil for a Fed policy shift looks likely to last all summer. The aggressive, cyclical market moves are happening in Europe, Japan and China.
Yet our equity market remains firm, the credit markets are still generous and we’re at that part of the cycle when corporate boards start to feel they should strike while conditions are right. We’ve already seen $1.5 trillion worth of announced global M&A so far this year, up 23% from year-ago levels. If the market is right in its quiet hunt for opportunity, then we might be in for an outbreak of summer romance among big companies.